2012 Preview: Royal Dutch Shell

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With 2011 almost in the rearview mirror, many investors start to mull over their portfolios and ask what comes next. It's a fair question, and the answers we find are really the crux of great investing. The ability to identify value before the market has already baked expectations into the stock price is what distinguishes the successful investor.

With that, let's take a look at Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) . The international oil and gas company showed an improved performance in its upstream and downstream businesses in 2011 and looks to continue that trend in 2012.

Shell's stats

Year-to-Date Stock Return10%
Market Cap$231 billion
Price/Earnings Ratio7.26
Estimated 5-Year EPS Growth Rate6.0%
Dividend Yield4.7%
CAPS Rating (out of 5)****

Sources: Yahoo! Finance and Motley Fool CAPS.

A look backward
Shell outperformed the S&P in 2011 on the strength of sales and production numbers.

That being said, the company also curbed production in Syria and Nigeria because of ongoing problems there. A company with a global presence like Shell is likely to continue to face geopolitical risk in 2012.

A look forward
In 2010, Shell put forth an operations plan to drive cash flow up 50%-80% by 2012. CEO Peter Voser ensures that the company is making progress toward that goal.

A part of that initiative comes from the production results of Shell's $30 billion investment in three projects, all of which should be monitored closely:

  • 100,000 barrels per day expansion project in Athabasca oil sands, bringing total capacity to 255,000 bbls/day.
  • 30% stake in Qatargas 4 LNG export facility.
  • Pearl gas-to-liquids project in Qatar. It delivered first shipment in June and is meant to reach full production potential in 2012. It's expected to increase Shell's production by 8%.

The company also launched 14 upstream projects between 2010 and the end of 2011, contributing to long-term growth potential.

Another important change in 2011 that could have a positive impact in 2012 is Shell's divestment of two oil leases in the Niger Delta. One of the properties had been shut down earlier this year because of sabotage and oil theft. Shell's Nigerian assets have increasingly become the target of militant activity, and though the company intends to maintain a presence there, its strategy is changing in the face of increasing liabilities.

Bottom line
Shell should expect strong gains in 2012. It is positioned to take advantage of lucrative LNG exports as well as profiting from its standard oil and gas business.

Looking for another stock idea for the new year? Check out what the Motley Fool's chief investment officer considers the top stock for 2012.

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